Thursday, July 14, 2011

Today's Globe business section has a major story on Essex South Register of Deeds John O'Brien and his efforts against MERS and "robo-signers." Because of articles such as this, there is increasing interest in this topic, so it seemed appropriate to address it here.

As I understand it, there are two separate issues. The first is Register O'Brien's assertion that MERS - Mortgage Electronic Registration System Inc - owes the Commonwealth millions of dollars in recording fees for mortgage assignments that were never recorded. With the second issue - robo-signers - O'Brien contends that employees of a number of major national entities or their related mortgage servicers signed the names of other employees to documents that were (and still are) presented for recording. O'Brien maintains that these signatures are fraudulent which would make the documents legally void and for that reason, he is refusing to record them. In the interest of space, today I'll address the MERS issue. Tomorrow we'll deal with robo-signers.

MERS first came to my attention in 1999. During the real estate crash of the early 1990s, many banks failed and it became difficult if not impossible for homeowners to obtain the legal documents necessary to establish that mortgages had been assigned or discharged. The purpose of MERS was to have a single entity that would hold the mortgage, almost as a trustee for the financial entity that held the underlying promissory note. With MERS, consumers would have a single point of contact for legal documents related to their mortgages. Now this arrangement does run counter to a fundamental principle of Massachusetts real estate law - that being that the mortgage always follows the note - but from 1999 until the commencement of this most recent housing collapse, everyone seemed to think MERS was a pretty good idea and no one complained about it.

At some point after the current real estate collapse, Register O'Brien (probably among others) contended that whenever a promissory note was transferred from one party to another, MERS should have recorded a corresponding assignment of that mortgage and paid the $75 recording fee. His estimate of the amount of fees owed, I believe, is based on the number of MERS mortgages recorded but not assigned.

Because, as I mentioned earlier, the MERS arrangement does ignore the Massachusetts "the mortgage follows the note" rule, it would be very useful to have a court decide whether O'Brien's interpretation of this arrangement is correct. The reason I say a court decision would be useful is that the pro-MERS side does have some arguments that the MERS system was valid legally. For example, there is no legal requirement that any document be recorded at the registry of deeds. When you buy a house, you do not have to record the deed you receive. It would be stupid not to, since by recording it you receive all the protection of the recording statute, but the law doesn't require that you record to convey title. The same is true for an assignment of mortgage. The Supreme Judicial Court of Massachusetts implied as much in the Ibanez case not too long ago. That case involved "missing" assignments. The court held in that case that a lender could prove the fact of an assignment through a variety of means in addition to the traditional way of recording a document.

This is not to say that MERS did not have to record the assignments. Perhaps it did; but with the arguments against it, I think it inevitable that the question would have to be resolved by the SJC or the Legislature. By bringing this issue into the public eye, Register O'Brien is speeding the resolution of this very important issue.

2 comments:

IN this State the legislature will ignore clearing up any item that might bring the foreclosure issue to a final close. Holding up the final bottoming of the Housing market and finally getting rid of all this inventory onto people who can afford a home is not in the interest of a legislature that has weened a substantial portion of our population into playing the system and knowing the process so that you never have to work or pay for a home that you never should have owned to begin with. In the meantime the one industry that could lite up the emplyment picture in the private sector of hard working blue collar construction workers and all the domino effect it would have on all industries in this state is stagnant for ever.

Thank you for what is a far more balanced view than the publicity campaign of your fellow register. The problem with Mr. O'Brien's claims is that they are not based upon the law, but are based on the false premises of his alleged forensic expert and an attorney who wishes to make a name for himself as someone who can stop foreclosures.

You have indicated that we need a court decision. We have already had decisions that touch directly and indirectly on the MERS concerns. With respect to the concept that the mortgage follows the note, and that therefore an assignment of the mortgage must be recorded, the SJC rejected that in Ibanez, " Second, the plaintiffs contend that, because they held the mortgage note, they had a sufficient financial interest in the mortgage to allow them to foreclose. In Massachusetts, where a note has been assigned but there is no written assignment of the mortgage underlying the note, the assignment of the note does not carry with it the assignment of the mortgage. Barnes v. Boardman, 149 Mass. 106, 114 (1889). Rather, the holder of the mortgage holds the mortgage in trust for the purchaser of the note, who has an equitable right to obtain an assignment of the mortgage, which may be accomplished by filing an action in court and obtaining an equitable order of assignment. Id. ("In some jurisdictions it is held that the mere transfer of the debt, without any assignment or even mention of the mortgage, carries the mortgage with it, so as to enable the assignee to assert his title in an action at law. . . . "

Even if it were true that the mortgage follows the note, it does not follow that an assignment of the mortgage must be recorded. As you point out, there is no statutory requirement to record.

Further the Land Court has upheld the MERS system when it has been challenged in the context of foreclosures.

Finally, as you point out, the MERS system is really akin to a trust situation in which there is a record holder of title and off record holders of the beneficial interest. That interest can be transferred off record, in the same manner as the notes are. The real concern is to insure that ultimately any action taken by a mortgagee should be by the record holder of the mortgage. Something that was affirmed by Ibanez.

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